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Playground Rules Apply: No Take Backs Even With Spendthrift Provision

82980840In the case, In re Indenture of Trust dated January 13, 1964, the Settlor’s grandson Milton learned that, just like on the playground, there are no take backs, even when the trust for his benefit contained a spendthrift provision that prohibited voluntary and involuntary transfer of his interest. As the blog, Dumb Little Man Tips for Life, describes the rule, “Once you give something, you can’t ask for it back. Whether it’s a physical gift, a gift of money, or a gift of time, asking for a takeback is pointless. It shows bad faith and makes you untrustworthy.”

While it may seem counter-intuitive to the purpose of a spendthrift provision, in certain circumstances, it may be desirable for a beneficiary of a spendthrift trust to make an assignment of his or

Life (and Litigation) Lesson of the Day: Don’t Bite the Hand That Feeds You

462913017Apparently, this life lesson was not learned, or if learned, was forgotten, by Roy Greenbaum, the Personal Representative in Estate of Tanenblatt v. Comm’r. The issue in this case concerned the valuation of a 16.667% interest in an LLC included in the Diane Tanenblatt’s gross estate.

The Nays Have It: Inherited IRAs are Not Exempt Assets in Bankruptcy

US Supreme CourtOn June 12, the United States Supreme Court in Clark v Rameker resolved the question that has recently split the 5th and 7th Circuits— Are inherited IRAs protected from the beneficiary’s creditors in a bankruptcy proceeding? The Court unanimously held that they are not.

An inherited IRA is a traditional or Roth IRA that has been inherited by a beneficiary after the death of the owner. This term does not include an IRA that has been “rolled over” by a spouse beneficiary into her own IRA.

In order to make their decision, the Court had to determine whether an inherited IRA constitutes “retirement funds”, which are exempt assets in a bankruptcy estate.

The Court focused on three legal characteristics of inherited IRAs that led to their conclusion that the

Settlor’s Residency at Trust Creation Not Sufficient to Subject Trust to Pennsylvania Income Taxation Under Commerce Clause

176961933Another recent court decision has looked at the constitutionality of the State imposing state income tax on an irrevocable trust. Last year, the Court in McNeil v. Commonwealth of Pennsylvania held that Pennsylvania’s attempt to tax the McNeil trusts, whose connection to Pennsylvania was (1) the residency of the settlor at the time the trust was created and (2) the residency of the trust’s discretionary beneficiaries was an unconstitutional violation of the Commerce Clause of the United States Constitution.

Illinois Income Taxation of Trusts: Minimum Contacts Besides Settlor’s Residency at Trust Creation Required

453118507Last week, we discussed the important issue that settlors, beneficiaries, and trustees of a trust should be thinking about—Do You Know Which States Are Trying to Tax Your Trust?  Two states’ courts have recently looked at what constitutes sufficient minimum contacts to subject a trust to the State’s income tax laws.  In this blog, we will discuss Illinois’ decision in Linn v. Dep’t of Revenue.  Come back next week for our discussion of Pennsylvania’s decision in McNeil v. Commonwealth of Pennsylvania.

Did You Know? Report Sale Transactions on Income Tax Returns of Trusts and Estates on New Form 8949

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The Internal Revenue Service is now asking for more information from Estates and Trusts in reporting capital gains. In completing Schedule D to the Form 1041, a Form 8949, Sales and Other Dispositions of Capital Assets, will now need to be completed by fiduciaries with the totals from Form 8949 then included on Schedule D. This is the same Form that has been used in prior years on individuals’ Form 1040.

When It Comes to Love and Money, Money Often Prevails

462235785On occasion, a case arises that causes wonder and amazement that children would complain that mom is receiving funds from a trust that either should be distributed to them or should be preserved for them. The Missouri case, O’Riley v. U.S. Bank, N.A., is just such a case.

The Trust was created on the death of Donald O’Riley in 1982 for the benefit of his wife, Arlene, and their two sons, Terrance and Gerald. In 2010, the sons filed this action against the Trustee for breach of its duty of impartiality in refusing to make distributions to them and favoring their mother, instead. The trial court entered judgment for the Trustee that it had not breached its duty of impartiality and the appellate court affirmed.

HERE COMES THE JUDGE: SUPREME COURT TO RULE ON CREDITOR PROTECTION IN BANKRUPTCY FOR INHERITED IRAs

US Supreme Court

In 2012, the Fifth Circuit ruled in In re Chilton that inherited IRAs constituted retirement funds within the “plain meaning” of §522 of the Bankruptcy Code and were thus exempt from the bankruptcy estate, under § 522(d)(12) (the federal exemptions). See our prior discussion of this case here.

IRS Issues Revenue Procedure Regarding Portability Election

Yesterday, the IRS released Rev. Proc. 2014-18, which provides a simplified method for certain taxpayers to obtain an extension of time to make a “portability” election, allowing a surviving spouse to apply a deceased spouse’s unused exclusion amount (deceased spousal unused exclusion amount, or DSUE amount)  to the surviving spouse’s subsequent transfers during life or at death.  For more discussions on portability, see our prior posts herehere, here, here and here (can you tell portability has been a hot topic in recent years?)

Under section 2010 (c)(5)(A) of the Code, a portability election must be made on a timely filed Form 706 (Estate Tax Return).  If an executor would not otherwise be required to file an Estate Tax Return, the executor may file for an extension of time under section 301.9100-3 to make the portability election.  In general, such an extension will be granted if the taxpayer establishes that the taxpayer

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